Proprietary Sales And Lending Will Shape Banking Outcomes Despite Risks

Key Takeaways

• Proprietary sales processes and deposit platforms drive consumer deposit growth, positively impacting revenue through enhanced customer relationships.
  
• Focus on stable net interest margins and credit risk management boosts net interest income and strengthens net margins.
  
• Economic uncertainty and competition in real estate challenge loan growth, margins, and revenue, while dependence on new hires introduces execution risks for future performance.

Catalysts

Operates as the bank holding company for S&T Bank that provides retail and commercial banking products and services to consumer, commercial, and small business in Pennsylvania and Ohio.

• S&T Bancorp has implemented a proprietary customer relationship sales process and a deposit exception pricing platform, which have matured and are expected to continue driving significant consumer deposit growth. This strategy is likely to positively impact revenue.
  
• The company anticipates continued loan growth, particularly in the commercial real estate and construction segments, supported by an increase in pipelines and newly hired bankers. This forward-looking activity suggests potential revenue growth and improved earnings.
  
• Management's focus on maintaining a stable net interest margin through favorable loan repricing, bond restructurings, and a received fixed swap ladder is expected to bolster net interest income in the future.
  
• Continued efforts to manage credit risk through enhanced data collection and customer conversations, alongside improved asset quality, are expected to support stronger net margins by potentially lowering provision expenses.
  
• S&T Bancorp is preparing for potential future growth both organically and through M&A, with particular attention on crossing the $10 billion asset threshold, which may lead to increased earnings and enhanced shareholder value.

S&T Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming S&T Bancorp's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.5% today to 27.4% in 3 years time.
• Analysts expect earnings to reach $120.5 million (and earnings per share of $3.13) by about May 2028, down from $133.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, up from 10.7x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

S&T Bancorp Future Earnings Per Share Growth

Risks

• Economic uncertainty, particularly around tariffs and foreign trade exposure, poses a risk to S&T Bancorp's loan growth projections and credit quality, potentially impacting net margins and earnings.
  
• Pressure from larger regional banks in the commercial real estate market has led to compressed spreads, which could negatively affect interest income and profitability.
  
• The C&I (Commercial & Industrial) segment experienced hesitancy and lack of growth due to economic uncertainty, impacting potential earnings from this sector.
  
• Asset sensitivity to rate cuts could affect margins if the Fed adjusts rates, posing a risk to achieving stable net interest income in the future.
  
• Dependence on new hires for expected loan growth in the latter half of 2025 suggests execution risk; failure to meet hiring and loan production targets could negatively impact revenue and net income.

Valuation

• The analysts have a consensus price target of $41.0 for S&T Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $439.4 million, earnings will come to $120.5 million, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $37.17, the analyst price target of $41.0 is 9.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.